Bitcoin challenges lawmakers, markets and the FBI

The jury will remain out for some time, but the concept of an unregulated international electronic currency has arrived, posing as great a threat to global trade and national sovereignty as an exhilarating boost.

Bitcoin is not what we traditionally think of as “currency.” It has no physical existence; it is neither printed nor minted; even the “wallet” where Bitcoins are stored is an ethereal concept. It may be the purest expression of free-market capitalism ever created: It is worth whatever public confidence and private individuals think it’s worth, and is backed by nothing more. If the “gold standard” has an opposite, Bitcoin is it.

Former FBI Special Agent Greg Coleman, who operates Coleman Worldwide Advisors, an anti-money laundering training and consulting firm in Manhattan, says he is not opposed to the idea of “digital currencies” but worries that “one of the issues that prevent me from supporting Bitcoin is that I’ve seen the same type of misleading marketing activity in many of the fraud cases that I investigated during my career at the FBI.”

Coleman, who retired from the FBI in January, is the man responsible for the 1998 arrest of the real-life “Wolf of Wall Street,” Jordan Belfort, the rogue New York City trader who swindled $200 million from an A-list of unsuspecting clients. The agent, portrayed by Kyle Chandler in the 2013 Martin Scorsese film starring Leonardo DiCaprio, specializes in money laundering, which was the key to capturing Belfort as he moved profits in and out of Switzerland.

Today, Coleman calls “false and misleading some of the ways in which Bitcoin is marketed,” which is entangled with issues surrounding its creation.

The originator of Bitcoin is an anonymous person, or people, employing Japanese pseudonym Satoshi Nakamoto. The idea was a “peer-to-peer” digital currency used by retailers and individuals, unregulated by governments, central banks or monetary authorities.

Potentially enormous earnings, he says, fuel “food for thought: Imagine if the person(s) who created Bitcoin did so because they thought by creating a new digital currency that they could circumvent government controls on financial transactions and hinder or prevent the government from following the flow of funds from their illegal activities.”

This – and the currency’s volatile value – suggests threats to the integrity of international financial systems, including offshore financial centers like the Cayman Islands.

Police have made at least five international arrests: Ross Ulbricht of Internet-based Silk Road was arrested in 2013 for using Bitcoin to allegedly distribute drugs, run guns and launder money; Charlie Schrem, CEO of Bitcoin exchange Bitinstant, was sentenced in December to two years in prison for money laundering and aiding an unlicensed money-transmitting business; in March this year Secret Service Agent Shaun Bridges and Drug Enforcement Agent Carl Force were charged with extortion, fraud and theft after allegedly embezzling Bitcoin as part of their investigation of Ulbricht’s Silk Road; and, finally, Tokyo-based Bitcoin exchange Mt. Gox, said to be the world’s largest, collapsed as police arrested CEO Mark Karpelès on Aug. 1 on suspicion of embezzling at least $1 million from Bitcoin clients following the disappearance of at least US$350 million from Mt. Gox servers.

Buying with real dollars

Bitcoin can be purchased with real dollars, but what accumulates in an owner’s online account, or “wallet,” is simply a collection of computer codes. Internet photos of gold-colored Bitcoins, Coleman says, are deceptive, “bear[ing] a striking resemblance to actual 1-ounce gold coins,” which have nothing to do with the “real” currency.

“Bitcoin is computer code created by multiple known and unknown computer programmers,” he says. It has value because people are led to believe it has value.

“The promoters of Bitcoin are attempting to give it value when they design and market it as if it’s a real coin. When you buy a Bitcoin, you are buying computer code, not a coin.”

More “food for thought,” he says: “If you call it a coin and you dress it up like a coin, but it’s actually computer code, it’s not a coin.”

Finally, calling it “a great marketing tool,” he rejects widespread claims that the digital currency is accepted by major companies such as Microsoft, Dell and Overstock.com.

“Unfortunately it’s only partially true,” Coleman says. “In reality, they continue to be paid in dollars, as they always have [been], for products that they produce. They advertise that they accept Bitcoin, but what they actually do is have an intermediary convert a sufficient quantity of Bitcoins into dollars at the current rate to cover the cost of the product. The risks associated with accepting Bitcoin are thereby mitigated.”

Little resolution is in sight, and, meanwhile, the security of investments in the phantom currency, transactions that depend on it, and its potentially insidious effects on sovereign currencies cast a long shadow.